PROPOSED RULEMAKING
STATE BOARD OF
ACCOUNTANCY
[49 PA. CODE CH. 11]
Commissions and Referral Fees
[30 Pa.B. 1271] The State Board of Accountancy (Board) proposes to amend § 11.24 (relating to commissions) to read as set forth in Annex A.
Background
Section 11.24, which was adopted in 1970 and amended in 1980, currently provides that a licensee (that is, a certified public accountant, public accountant or public accounting firm) may not pay a commission to obtain a client or accept a commission for referring a client to the products and services of others. The section does not prohibit payments for the purchase of the assets of an accounting practice, retirement payments to former practitioners, or payments to the heirs and estates of retired practitioners.
Section 11.24 was superseded by section 12(p) of the CPA Law (63 P. S. § 9.12(p)), which was added by the act of December 4, 1996 (P. L. 851, No. 140) (Act 140). Section 12(p)(1) of the CPA Law permits a licensee in public practice to receive a commission--defined as compensation for recommending or referring to a client a product or service to be supplied by another person--provided the licensee or the licensee's firm does not also perform any of the following attest activities for the client: (i) audit or review of a financial statement; (ii) compilation of a financial statement, when it is reasonably expected that a third party would use the financial statement and there is no disclosure of lack of independence; or (iii) examination of prospective financial information. Section 12(p)(3) of the CPA Law permits a licensee to pay or accept a referral fee, which is defined as compensation paid to a licensee for recommending another licensee's professional services. Section 12(p)(2) and (3) of the CPA Law require a licensee to disclose to a client payment or receipt of a commission or referral fee. Section 12(p)(4) of the CPA Law requires that the disclosure be clear, conspicuous and in writing; state the amount of the commission or referral fee or the basis on which its computed; and be made, in the case of a commission, at or before the time when the recommendation or the referral of the product or service is made, or, in the case of a referral fee, at or before the time the client retains the licensee to whom the client has been referred. Section 12(p)(4) of the CPA Law also directs the Board to promulgate regulations specifying the terms and manner of disclosure. Section 12(p)(5) of the CPA Law exempts the same three categories in the current § 11.24 and adds a fourth, incentive or bonus payments to a licensee by the licensee's employing firm.
The Board's proposal is intended to revise § 11.24 so that it is complementary of the provisions set forth in section 12(p) of the CPA Law.
Description of Amendments
The amendments would delete the existing language in § 11.24, which prohibits commissions and referral fees absolutely, and replace it with seven new subsections.
General. Subsection (a) would provide that a licensee is permitted to receive commissions or to accept or pay referral fees subject to the requirements of section 12(p) of the CPA Law and this section.
Notification to Board. Subsection (b) would require a licensee who receives or intends to receive commissions to report that fact on the application for biennial renewal of licensure. The information would assist the Board in determining which licensees require monitoring to ensure compliance with disclosure and other requirements.
Cooperation with peer reviewers. Subsection (c) would require a licensee who receives commissions and who is subject to peer review under section 8.9 of the CPA Law (63 P. S. § 9.8i), to furnish peer reviewers with the necessary documentation to establish the licensee's compliance with section 12(p) of the CPA Law and this section. A licensee who sells commission-based products or services to attest clients will not receive an unqualified peer review report.
Related licensure/registration. Subsection (d) would require a licensee, prior to receiving commissions, to acquire and maintain in good standing any license or registration required by any governmental or regulatory agency for receiving commissions. Licensees who sell securities, for example, may need to be registered with the Pennsylvania Securities Commission or the National Association of Securities Dealers.
Disclosure to client. Subsection (e) would require a licensee who receives commissions or who accepts or pays referral fees to make the disclosures required by section 12(p)(4) of the CPA Law in engagement or representation letters that are signed by the clients. This requirement would help to ensure that clients receive meaningful and timely disclosures, and would provide a context in which clients may evaluate the commissions or referral fees in connection with other fees charged by the licensee.
Workpapers. Subsection (f) would require a licensee who receives commissions to maintain workpapers that document discussions regarding the clients' investment needs, the investment strategies considered, and the bases for the investment strategies recommended by the licensee. This requirement would ensure that a licensee exercise professional judgment in the course of recommending or referring commission-based products or services to clients. A licensee's referral of a client to the public accounting services of another licensee generally does not involve the exercise of professional judgment.
Attest client. Subsection (g) would provide that for purposes of section 12(p)(1) of the CPA Law, a licensee who performs an attest activity for a client (except for a compilation of financial statements accompanied by a disclosure of lack of independence as permitted under section 12(p)(ii) of the CPA Law), may not receive a commission for recommending or referring a product or service to an individual or entity that can exercise significant influence over the client's operating, financial and accounting policies. ''Significant influence'' would include, but not be limited to, situations in which the individual or entity (1) is connected with the client as a promoter, underwriter, voting trustee, general partner or non-honorary director; (2) is connected with the client in a policy-making position related to the client's primary operating, financial, or accounting policies, such as chief executive officer, chief operating officer, chief financial officer, or chief accounting officer; or (3) meets the criteria established in Accounting Principles Board Opinion No. 18, ''The Equity Method of Accounting for Investments in Common Stock,'' and its interpretations, to determine the ability of an investor to exercise the influence with respect to the client.
This subsection addresses the situation, not specifically dealt with in section 12(p)(1) of the CPA Law, where a licensee receives a commission for a product or service sold to an individual or entity that, although not an attest client of the licensee, can nevertheless directly and substantially impact the business affairs of another client for which the licensee performs attest services. An example would be where a licensee has a two-member partnership as an attest client, and the licensee receives a commission on the sale of a product or service to a nonattest client that is a 50% partner in the partnership. The Board believes that a licensee's receipt of a commission in these circumstances could have an adverse impact on the licensee's independence with respect to the attest client. The Board's proposed ''significant influence'' standard is derived verbatim from the American Institute of Certified Public Accountants' Code of Professional Conduct's Ethical Interpretation relating to the effect that a certified public accountant's financial interest in a nonclient has on his independence with a client when the nonclient has an investor or investee relationship with the client (ET § 101.10).
Statutory Authority
Section 3(a)(11) and (12) of the CPA Law empowers the Board to promulgate, respectively, regulations relating to professional conduct and administrative regulations necessary to carry out of the CPA Law. Section 12(p)(4) of the CPA Law empowers the Board to promulgate regulations specifying minimum disclosure requirements when receiving commissions or accepting or paying referral fees.
Fiscal Impact and Paperwork Requirements
The amendments' principal fiscal impact on the regulated community would be the loss of potential commissions in situations where, as set forth in proposed § 11.24(g), the party to whom a licensee desires to recommend a commission-based product or service is in the position of exercising significant influence over an attest client of the licensee. The Board has no way to estimate the financial cost to licensees of lost commission opportunities. The amendments would not have a fiscal impact on the Commonwealth's agencies or its political subdivisions.
The amendments would require licensees to maintain records of their disclosures of commissions and referral fees as well as workpapers documenting the appropriateness of recommending or referring particular commission-based products or services to clients. The amendments would require the Board to revise its biennial renewal form to include a question about whether the licensee receives commissions; the Board intends to use this information for the purpose of monitoring compliance with the amendments' other requirements. The amendments would not create new paperwork requirements for the Commonwealth's other agencies, the Commonwealth's political subdivisions, or other segments of the private sector.
Compliance with Executive Order 1996-1
In accordance with Executive Order 1996-1 (relating to regulatory review and promulgation), the Board, in developing the amendments, solicited comments from the major professional organizations that represent certified public accountants and public accountants in this Commonwealth.
Regulatory Review
Under section 5(a) of the Regulatory Review Act (71 P. S. § 745.5(a)), on February 23, 2000, the Board submitted copies of this proposed rulemaking to the Independent Regulatory Review Commission (IRRC), the Senate Standing Committee on Consumer Protection and Professional Licensure, and the House Standing Committee on Professional Licensure. The Board also provided IRRC and the Committees with copies of a regulatory analysis form prepared in compliance with Executive Order 1996-1. Copies of these forms are available to the public upon request.
If IRRC has objections to any portion of the proposed amendment, it will notify the Board within 10 days following the close of the Committees' review period, specifying the regulatory review criteria that have not been met. The Regulatory Review Act sets forth procedures that permit IRRC, the General Assembly and the Governor to review any objections prior to final adoption of the amendments.
Public Comment
The Board invites interested persons to submit written comments, suggestions or objections regarding the proposed amendments to Steven Wennberg, Esq., State Board of Accountancy, P. O. Box 2649, Harrisburg, PA 17105-2649 within 30 days following publication of this notice of proposed rulemaking in the Pennsylvania Bulletin.
THOMAS J. BAUMGARTNER, CPA,
ChairpersonFiscal Note: 16A-557. No fiscal impact; (8) recommends adoption.
Annex A
TITLE 49. PROFESSIONAL AND
VOCATIONAL STANDARDS
PART I. DEPARTMENT OF STATE
Subpart A. PROFESSIONAL AND
OCCUPATIONAL AFFAIRS
CHAPTER 11. STATE BOARD OF ACCOUNTANCY
GENERAL PROVISIONS § 11.24. Commissions and referral fees.
(a) General. [A licensee may not pay a commission to obtain a client nor accept a commission for a referral to a client of products or services of others. This section does not prohibit payments for the purchase of all or a material part of an accounting practice, or retirement payments to persons formerly engaged in the practice of public accounting or payments to the heirs or estates of those persons.] A licensee engaged in public practice is permitted to receive commissions and accept or pay referral fees subject to the requirements in section 12(p) of the act (63 P. S. § 9.12(p)) and this section.
(b) Notification to Board. A licensee who receives or intends to receive commissions shall report this fact on the application for biennial renewal of the license.
(c) Cooperation with peer reviewer. A licensee who receives commissions and who is subject to peer review under section 8.9 of the act (63 P. S. § 9.8i) shall furnish peer reviewers with the necessary documentation to establish compliance with section 12(p) of the act and this section.
(d) Related licensure/registration. Prior to receiving commissions, a licensee shall acquire and maintain in good standing any license or registration required by another governmental or regulatory body for the purpose of receiving commissions.
(e) Disclosure to client. A licensee who receives a commission or who accepts or pays a referral fee shall make the disclosures required by section 12(p)(4) of the act in an engagement or representation letter that is signed by the client.
(f) Workpapers. A licensee who receives a commission shall maintain workpapers that document discussions regarding the client's investment needs, the investment strategies considered, and the basis for the investment strategy recommended by the licensee.
(g) Attest clients. For purposes of section 12(p)(1) of the act, a licensee who performs an attest activity for a client, except as set forth in section 12(p)(1)(ii) of the act, may not receive a commission for recommending or referring a product or service to an individual or entity that can exercise significant influence over the operating, financial or accounting policies of the client. For purposes of this subsection, ''significant influence'' includes the following situations:
(i) The individual or entity is connected with the client as a promoter, underwriter, voting trustee, general partner or director (other than an honorary director as defined in the AICPA Code of Professional Conduct).
(ii) The individual or entity is connected with the client in a policymaking position related to the client's primary operating, financial, or accounting policies, such as chief executive officer, chief operating officer, chief financial officer or chief accounting officer.
(iii) The individual or entity meets the criteria established in Accounting Principles Board Opinion No. 18. The Equity Method of Accounting for Investments in Common Stock, and its interpretations, to determine the ability of an investor to exercise such influence with respect to the client.
[Pa.B. Doc. No. 00-382. Filed for public inspection March 3, 2000, 9:00 a.m.]
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